Deleveraging to be one of the biggest stories playing out in FY18: S Krishna Kumar

In an interview to CNBC-TV18's Ekta Batra and Mangalam Maloo, S Krishna Kumar CIO -Equity Sundaram Mutual Fund and Ashwani Gujral ashwanigujral.com shared their reading and outlook on Indian markets and specific stocks.

In an interview to CNBC-TV18's Ekta Batra and Mangalam Maloo, S Krishna Kumar CIO -Equity Sundaram Mutual Fund and Ashwani Gujral ashwanigujral.com shared their reading and outlook on Indian markets and specific stocks.

Below is the verbatim transcript of the interview.

Mangalam: The midcap index that saw a bit of a dip on the first trading day of the week, then recovered and is now up for the week. Do you think the momentum in the midcaps is still there, the valuations, do they support the markets or is it just liquidity driven?

Kumar: If you look at the broad macros in the last few weeks, we have been seeing a lot more positivity in terms of the monsoons being on time and being close to normal. That is a pretty much positive signal to bigger parts of the economy. You also seen that the momentum in terms of infrastructure projects has been picking up. The tendering activity at different levels and awards has been improving. In the results season, you have clearly seen an articulation of this by many companies were seeing fairly acceleration in order books, etc.

So, the prospects of a broad-based recovery in the economy is very strong at this point in time be it investment led, consumption led, be it service sector led. There is a fair bit of positive momentum in the economy at this point in time. And also, in terms of the midcap segment, if you look at the results that we are seeing, clearly you have seen that a lot of companies have reported a strong showing across different sectors and we do believe that with a 20-25 percent earnings trajectory that some of these companies are exhibiting, there is a lot of comfort in terms of visible earnings growth that we can pen in for the next couple of years for these companies.

So from a valuation perspective we are looking at the growth vis-à-vis valuation, the midcap space continues to be quite attractive for investors who would like to stay invested for a couple of years or more.

Ekta: While I know that you cannot comment on specific stocks, two stocks which really stood out to me and which describe a larger problem is Videocon and Reliance Communication this week. Reliance Communication losing 20 percent of its market cap and Videocon thereabout those levels as well. What does it tell you in terms of the leverage story which is going to play out in FY18 from and industry perspective talking about Reliance Communication that is the telecom space as well as from a debt perspective.

Kumar: I would tend to look at this as an opportunity for investors for the simple reason that many of these problems that are being recognised and which are surfacing into media headlines are all issues which we have been dealing in the last couple of years. So we are hastening towards a resolution kind of a timeframe given that the government, the banking bureau, the RBI are all behind the PSU banks and the other corporate lenders to settle some of these outstanding stress issues and move on basically.

So in the last one month we have seen a flurry of activity with a lot of RBI guidelines coming on how to resolve some of the stress and what kind of haircuts to take and the procedures to be followed basically. And if you look at the National Company Law Tribunal (NCLT), we have seen a lot of applications also coming in there which will all help in resolving the stress issue in a much quicker manner and in a manner in which the companies could move on with new owners or promoters or whatsoever.

So there is a bigger opportunity for investors here where if investors could identify good turnaround opportunities, one should be looking at these segments positively rather than worry about issues which have always been there in the limelight. So next six months we see a lot more of these news flows to happen across different stressed companies and we see resolution also accelerating in the next six months which provide a good opportunity.

On the banking side also, the banks have been clogged by non-resolution of these issues and once these things get resolved, there would be a lot more clarity in terms of the way forward in terms of credit growth and lending to new sectors, etc. So, this is a healthy thing to happen at this point in time and not something we should be worried about beyond a point.

Ekta: The GMR Infrastructure stock was up around 13 percent odd on Friday just on the basis of this debt reduction that they have managed. Do you believe in such turnaround stories and the infrastructure space as a whole?

Kumar: This is going to be the biggest theme for FY18. We are going to see a lot of companies which have good assets being able to turnaround, go in for a strategic debt reduction, go in for getting in equity and finding some buyers for some projects so thereby getting a lot more fitter and healthier and then getting on to business. So, this would ensure that the good assets get revalued up and the discount that currently the stocks trade in will vanish and you will get back to normal valuations which will take into account the next many years of growth and profitability of these companies.

So clearly, not just infrastructure, across different sectors, across steel, textiles, as in manufacturing companies which also have some amount of stress due to certain delays in projects, etc. all of them will get resolved and we will be able to definitely find a lot of opportunities to invest through turnarounds in the next 12 months.

Mangalam: One theme that really stood out this week was also the bottom fishing that we saw in the pharmaceutical stocks, most of them gaining anywhere between 9 and 13 percent at least in the frontline space, ex Sun Pharmaceutical Industries, that is. So do you think that there is some value here or this was just a trading pop?

Kumar: The pharmaceutical sector has been through tremendous strain in the last couple of years because of issues concerning US Food and Drug Administration (FDA) inspections, falling generic prices and shrinking opportunities in addition to the pricing pressures on the domestic front too. So it has been whacked all around and current prices reflect complete pessimism on the sector. The ownership of pharmaceutical companies have come to multiyear lows basically and there is a sense of untouchability to these companies at this point in time.

So these characteristics actually represent a true contrarian investing opportunity with a good 2-3 year perspective. So if one has a fairly long-term view, pharmaceuticals would make sense to get invested into in the next three months. However, it again depends on investor appetite to hold with a contra perspective. So contra investing is not something which is mainstream so one needs to also take into that.

Ekta: What was your sense in terms of the entire trading session with the Nifty ending Friday at 9653 as well as your stock calls?

Gujral: Market continues to remain in some kind of sideways consolidation, notwithstanding today's 30 point type of move because the breakout did not happen. It appears that probably this phase of the market, large caps may not participate to that extent and maybe Nifty just shifts its range to the upside from 9550-9650 to 9650-9750.

I think midcaps are again taking momentum and that is where people should participate.

Mangalam: A word on the bank Nifty as well, that one underperformed. Do you think that is likely to continue and what exactly are your trading picks for next week?

Gujral: Similar story on the bank Nifty. Generally a first day bank Nifty does 200-250 post a breakout but today it was lacking its mojo. ICICI Bank, State Bank of India, Axis Bank, again not able to participate. So, maybe a few small PSU banks can participate. However overall bank Nifty remains in 23200-23600 type of range.

Ekta: Your picks?

Gujral: Several stocks broke out after long consolidation. Realty sector came back, so Godrej Properties you can buy for a target of about Rs 580.

Sun TV after a large correction is now beginning to move higher. This can be bought with a target of about Rs 880.

Ekta: What is your call on Reliance Communication?

Gujral: It is not a great investment in a market where you have several consumer stories, NBFCs etc doing well. I don't think Reliance Communication can go anywhere in hurry. If there is some resolution, somebody takes it over like Satyam case, that is an outside chance. However for a normal retail investor, I think they have better stocks to enter into.

Mangalam: What is your call on GMR Infra?

Gujral: Let me give you a simple caveat that infrastructure is not the business of retail investors. Get out of all infrastructure stocks because you are getting a chance in HCC, GMR Infra. They have been dogs forever and they will again fall back to the same price because if they go up another 10 percent, these guys will start coming out with QIPs, they will dilute you till the stock price goes down to zero. So, just get out and use this rally for an exit.

Gujral: Keep a stop at about Rs 450 because we have seen reasonably decent pharma companies literally go through the floor. So, Rs 450 is your stop. It is a better looking chart than many other pharma stocks which are in down trend but this is in an uptrend. So, I would think Rs 600-620 is your next target. However if something goes wrong and it starts going through Rs 450, that should be the end of your story.